Flashcards in Capital Gains Tax Deck (43)
What is capital gains tax?
A tax paid by UK resident individuals and UK resident trustees/PRs on gains made of disposals of certain assets.
Companies pay corporation tax rather than CGT
What is the change in ruling that has come in on 6th April 2015 regarding UK residential property and a non UK resident?
If they sell any UK residential property after this date and they are non UK resident then CGT is payable
What are the 4 definitions of disposal?
* Sale/surrender of an asset
*Gift of an asset ( during a donor's lifetime)
*Transfer or assets from a trust to a beneficiary
*Destruction of an asset where the money received from an insurance claim or compensation will be the disposal proceeds. [Where no monies are received then this will be classed as a loss for CGT purposes
How does HMRC decide whether someone is trading and therefore whether the asset is making a regular profit and should be taxed as income tax or this is a one off transaction which CGT should be paid?
They review 9 badges of trade - not every badge needs to be present as the court looks at the overall position:-
*Is there a profit seeking motive
*The number of transactions
*The nature of the asset
*Evidence of similar transactions
*Changes to the asset - has it been repaired to sell on
*Way the sale was carried out
*Source of the finance
*Interval of time between purchase and sale - trade is usually sold quickly
*Method of acquisition
Name some of the assets that are exempt? - (16)
*Bank/building society accounts
*Gilts and qualifying corporate bonds
*Principle private residence
*Decorations for valour
*Private motor vehicles
*Foreign currency for expenditure abroad
*Shares in VCTs
*Shares in EISs and SEISs
*Shares in an approved incentive plan
*Non wasting chattels if deposit value is less than £6000
*Wasting chattels ( with a useful life of less than 50 years eg race horse, fine wine
*ISAs, Junior ISAs and CTFs
Name 4 assets that are not exempt?
*Property that is not a main residence
*Non qualifying corporate bonds
*Second hand insurance polices
*Unit trusts/OEICS investing in gilts and qualifying corporate bonds
What is the principle private residence relief (PPR)
Where a private residence is exempt from CGT
If a portion of the property has not always been part of the main residence then you apply a formula to see if there is some CGT that would need paying:-
Period of time occupied or otherwise exempt
Period of ownership
What absences are allowed in respect to private residence?
*One year between taking residence and acquisition
*Last 18 months ownership
*where someone is absent as they have been living in job-related accommodation
*Any 4 year period if caused by employment elsewhere in the UK, provided that the individual resided there before and after the absence and no other residence was exempt
*Any 3 year period provided that the individual resided there before and after the absence and no other residence was exempt
*Any period if caused by overseas employment, provided that the individual resided there before and after the absence and no other residence was exempt
What must an individual do if they have two residences?
They must notify HMRC as to which one is the main residence and which one is not. The notice must be given after 2 years after acquisition of the second property
What is the rule around non wasting chattels?
Exempt if disposal value is £6000 or less. If a set ie 2 vases then the £6000 is the set.
What happens with a chattel where it is worth more than £6000?
Chargeable gain is the lower of:-
* the actual gain
* 5/3 of the excess of the proceeds over £6000
What is the ruling around disposals between spouses and civil partners?
No disposal is classed as having taken place so no CGT
On the end disposal the acquisition cost of the first spouse is used
What is the rules around CGT transfers to spouses where they have separated?
In the first year the transfer is not subject to CGT.
On the next year there will be CGT payable and this is calculated on market value on the date of transfer as they would be classed as connected people
Is a transfer to a HMRC registered charity or national institution exempt?
Can you transfer the annual CGT exemption?
Is the date of the transfer of the asset or the date or payment or the date of disposal the date of the contract and from when CGT is payable?
Date of disposal
What is deferred consideration in respect to CGT?
Where there is a delay in payment and the amount of consideration is ascertainable, this means that CGT becomes payable by the seller before payment has been received
What is contingent consideration in respect to CGT?
This is where an additional payment is made if a certain event or circumstance occurs (eg. profits after a sale reaching a certain level) then this s later received will be classed as a separate disposal
What happens with CGT when spouses or civil partners dispose of jointly held assets?
The gain is apportioned by:
* Either 50/50
*Or by the pre-agreed percentage if tenants in common
What happens with CGT if the disposal is not at arms length?
This is where an asset is sold to a relative or a friend.
The market value is used rather than the sale proceeds.
Name 4 examples of incidental acquisition costs that can be deducted in the CGT calculation?
*Stamp duty land tax
*Stamp duty reserve tax
*Estate agent fees
What is enhancement expenditure in relation to CGT?
It is something that is wholly and exclusively incurred on a asset for the purpose of enhancing the value of the asset and reflects in the state of the asset on the date of the disposal eg building an extension to a property
Can maintenance expenses be deducted for CGT purposes?
No but they can for income tax purposes
Eg repairs and re- decorating could be deducted as an income tax expenses but if an extension to a property is built then this would be treated as enhancement expenditure
What are the rules on when losses can be offset when calculating CGT? (7)
The loss must be :-
*A loss that is not exempt from CGT
*A loss from an EIS or SEIS
The loss must be registered with HMRC
This has to be within 4 years from the end of the tax year
If not registered then it cannot be used
The loss must be offset against losses in that same tax year
Losses cannot be carried back
Losses can be carried forward indefinitely
What is the advantage of a brought forward loss with CGT?
It can be used more flexible than the same tax year loss as you can use just the amount up to the level of the annual exemption. Any left over can then be carried forward again to use on a another year
What is the rule with CGT if an asset was bought before 1st April 1982?
The gain is calculated using the market value of 31st March 1982
Why are CGT reliefs given?
To ensure that businesses are not disadvantaged and to encourage entrepreneurship and venture capital
What are the rules in using EIS and SEIS to offset any capital gains tax? (4)
If the gain is made from the disposal of another investment, then the CGT may be deferred if the gain is invested either into an EIS or SEIS
There is no upper limit on this
Investment must be made either one year before or 3 years after the disposal
This deferred gain may be taxable at a later date on disposal of the EIS ( at the rate of CGT at this point)
When can someone claim entrepreneurs' relief?
When an individual disposes after holding for at least a year:-
* all or an independent separate part of a trading business on as a sole trader or partner
*assets of a trading (individual/partner) business following its cessation
*Shares/securities in a personal trading company where the individual is a director or employee of the company and holds a minimum of 5% of the ordinary share capital and 5% of voting rights for at least 1 year
Can still apply for relief if the shares are sold within 3 years of the cessation of trade